Demand for Apple's (NASDAQ: AAPL) iPhone 8 series of devices has been poor, according to some reports.
Image source: Apple.
For example, the Economic Daily News claims that once the iPhone X is available, Apple plans to cut the production of its iPhone 8 and iPhone 8 Plus phones in about half.
This, coupled with some downbeat commentary from the CEOs of a few wireless carriers regarding iPhone 8 demand, has some Apple investors a little spooked; as a result, Apple stock dropped nearly 3% in the Oct. 19 trading session.
But seemingly poor demand for the iPhone 8 and iPhone 8 Plus shouldn't have Apple stockholders losing their wits. It's important to understand why.
The true purpose of the iPhone 8 and iPhone 8 Plus
The iPhone 8 and iPhone 8 Plus, despite being touted by Apple as the next generation of iPhones (with the iPhone X being held up as a sort of preview of the iPhone's future), the fact is that, as nice as they are, neither is Apple's flagship.
They were developed and launched, I believe, as a sort of backup plan.
The iPhone X is clearly Apple's true next-generation iPhone, given the new form factor, inclusion of an all-new full-face OLED (organic light-emitting diode) display, addition of the TrueDepth camera, and the highest-spec rear cameras of any iPhone.
Image source: Apple.
However, for Apple to deliver this vision, it couldn't restrict itself to the confines of a $699 or even $749 starting price. For Apple to get paid what it thinks is a fair amount for its innovation, it needed to price these phones at a minimum of $999.
It would have been insanely risky for Apple simply to release a new iPhone generation at a starting price of $999 without offering anything new at more traditional price points. Though the iPhone X is obviously a sleek and compelling device, Apple can't run its business under the assumption that every potential iPhone customer is able or willing to spend at least $999 on a new smartphone.
Apple also couldn't simply keep the iPhone 7 and iPhone 7 Plus at the same price points they had at launch, since they are year-old models in a highly competitive, fast-paced market.
The iPhone 8 and iPhone 8 Plus are a good solution to Apple's dilemma. For users who simply want the best phones possible at traditional iPhone price points, these fit the bill. They have all the things that customers should expect from new flagship smartphones -- better cameras, faster internals, sleeker design, and other new features.
In other words: Apple was hedging its bets. If customers simply wanted better phones for the same prices as last year's phones, Apple had them available. But if customers wanted substantially better phones for a few hundred dollars more than last year's phones, then Apple has that option available to customers, too.
I think Apple ultimately expects customers, by and large, to opt for the pricier iPhone X if they're buying a new iPhone this year. There have been numerous supply-chain reports from credible sources suggesting that Apple is planning to build and ship a lot of the iPhone X phones.
My guess is that, in the spirit of hedging its bets, Apple made sure to crank out a lot of iPhone 8 and iPhone 8 Plus phones -- and ensured it had enough production capacity in place so those could carry the current iPhone product cycle if customer reception to the iPhone X is poor.
The supply-chain cuts that we're hearing about, then, could very well be Apple cutting back on iPhone 8 and iPhone 8 Plus production -- because its data tells it that many potential customers are waiting for, and willing to buy, the pricier iPhone X when it lands.
So if you're an Apple stockholder, relax. There's nothing to worry about yet.
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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.